New law creates IRS paperwork for rental owners

Need a plumber to fix a sink at your rental property? Get ready to deal with the Internal Revenue Service.

A small-business bill poised to become law includes new tax reporting requirements for rental property owners and a second provision calling for steep increases in fines for any person or business who fails to furnish correct information to the IRS, such as 1099 forms for services and purchases.

The two provisions are tucked inside the Small Business Lending Fund Act, which passed the Senate Thursday. A report issued last week by the Joint Committee on Taxation calculates that the two provisions combined would raise about $3 billion of the overall $30 billion cost of the legislation.

According to the bill's proposed new rules on rental property, owners who pay $600 or more for a service such as plumbing, landscaping or painting, would be required to issue 1099 forms to the IRS and whoever provided the work.

“Under the provision, recipients of rental income from real estate generally are subject to the same information reporting requirements as taxpayers engaged in a trade or business,” the JCT reported.

The new rental reporting requirements would go into effect on Dec. 31 this year and would likely affect millions of property owners, say taxpayer advocates.

“You've got to be kidding me,” said Tom Schatz, president of the watchdog group Citizens Against Government Waste, when told about the provision. “Honestly, it's an outrageous burden for rental owners.”

A spokesman for Sen. Mary Landrieu, D-La., who sponsored the Small Business Lending Fund Act, would not comment on the two provisions, but said Landrieu has introduced legislation to overhaul 1099 reporting requirements.

The higher penalties called for in the bill, which would apply not just to rental income transactions but any person who files a 1099 form, would take effect on Jan. 1, 2011.

Fines would double for each 1099 form someone fails to send to the IRS, increasing to $60 for individuals and $250 for small businesses.

The maximum fine the IRS could impose overall on small businesses for not sending in the information would double or triple, increasing to as much as $250,000.

The increase in fines would come as tax reporting requirements are scheduled to skyrocket under the new health care reform law.

The law includes a provision requiring small businesses to report to the IRS via a 1099 form all transactions that cost $600 or more, which would help bring in an estimated $17 billion in additional tax revenue.

The new reporting requirement would exempt some people, including the military and those who receive “only minimal amounts of income” from their rentals, but it does not specify the threshold.

Ironically, the Senate had tried to amend the small business bill last week to reduce the 1099 reporting requirement for small businesses, because many lawmakers believe it will be a costly administrative burden on business owners.

But partisan fighting kept the Senate from fixing the problem and instead lawmakers increased its scope and penalties by passing the bill with the added 1099 requirement for rental property owners and the steeper fines.

“It does make you wonder if the senators read the bill,” said Mike Tanner, senior fellow with the Cato Institute, a libertarian think tank. “I would be stunned if any senator would think this would be a great new policy. I suspect a committee staffer stuck it in the bill and nobody paid attention to it.”